Question

How are partnership ratios determined when a new partner enters a partnership for a percentage greater than what they contributed? How are the liabilities of a partnership allocated when a partnership is liquidated?

Answer 1

1. Partnership Ratios:-

There are three types of terms used to define the ratios:

• New profit sharing ratio: Ratio in which the partners decide to share profits/losses in future.
• Gaining ratio: Ratio in which the partners have agreed to gain their share of profit from other partners.
• Sacrificing ratio: Ratio in which the partners have agreed to sacrifice their share of profit in favour of other partners. Sacrificing ratio= Old Ratio – New Ratio

Let us assume A and B are partners sharing 50% share each (1:1 ratio) with capital contribution of $1,000 each. In case another partner C joins for a contribution $500 (lesser than A and B) for 33% share (1:1:1 ratio).

For 33% share A or B would have paid $1,000 x 33/50 = $660. However C contributes lesser than that, the reason may be many for this say C has more experience than A and B or C has a special technical expertise required for the partnership,etc. The sacrfice ratio for the other two partners would be 17% each partner (50%-33%).

Assumption: the rounding off percentage (sum would be 33 x 3 = 99) would be taken up by A.

It is therefore similar to calculation of ratio in case of any other partner joining.

2. Liabilities of the partnership

The liabilities are liquidated in the order of secured creditors(Government, Loan, Employee payables), Other creditors , and then Partner's capital. The partners would take up the deficiency during the liquidation in their Profit sharing ratio.

Assumption: Partnership is with Unlimited liability and not an LLP. No partner is bankrupt. In case he is garner vs murray rule is to be applied.